AT&T Inc (T) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AT&T second-quarter earnings release for 2007 conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Richard Dietz.

Mr.

Dietz, you may begin.

Great.

Thank you, Tatiana, and good morning, everyone, and welcome.

It's great to have you with us morning for our second-quarter earnings call.

Joining me on the call this morning is Rick Lindner, AT&T's Chief Financial Officer.

And Rick will cover our results, our outlook, and then at the end of our presentation, we will have a Q&A session.

Our release, investor briefing, the supplementary information and the presentation slides we will speak to on this call are all available on the Investor Relations page of the AT&T Website.

That is att.com/investor.relations.

Before we get started, I need to cover our Safe Harbor statement, which is on slide 3 of the presentation.

Information set forth in this presentation contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially.

A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission.

AT&T disclaims any obligation to update or revise statements contained in these presentations based on new information or otherwise.

This presentation may contain certain non-GAAP financial measures.

Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on our Website -- and again, that is att.com/investor.relations.

Okay.

I also want to quickly cover our EPS comparisons, which are on slide 4 of the presentation.

Adjusted EPS for the second quarter was $0.70.

Reported EPS this quarter was $0.47.

We had $0.21 of merger costs, and there was a $0.02 impact for the effect of purchase accounting on Advertising & Publishing's deferred revenues and expenses from the BellSouth acquisition.

You will note that 85% of our second-quarter adjustments were noncash.

Adjusted EPS this quarter is up more than 20% from the $0.58 in the second quarter of 2006.

This growth reflects strong operational progress in both wireless and wireline, including strong merger execution and further ramp in revenue growth.

EPS this quarter also benefited about $0.01 from impacts related to tax settlements and state tax legislation, and $0.01 from the monetization of nonstrategic assets.

With that as background, I will now turn it over to AT&T's Senior Executive Vice President and CFO, Rick Lindner.

Rick?

Thanks, Rich, and good morning, everyone.

Before I cover the details, let me begin with a couple of quick overview comments on the quarter and the major trends that I believe are providing much better visibility on the longer-term potential of the business.

Looking at slide 6, I think item number one this quarter has to be the continued ramp in our top-line revenue growth, building on improved trends over the past four quarters.

Wireless growth is accelerating, and the much-anticipated iPhone launch went very well.

Regional results were solid.

We delivered a significant improvement in enterprise trends, with a clear line of sight to positive revenue growth in this high potential area of our business.

Our U-verse video product rollout began to ramp in the quarter, and the results are encouraging.

In addition to top-line progress, we continue to execute and deliver on merger synergies.

And as a result, margins were solid, free cash flow was strong.

We completed our $10 billion share buyback ahead of schedule in early July.

And we have good operational momentum heading into the second half of the year.

So as a general overview, AT&T posted another strong quarter.

We're on a good trajectory for the second half, with increased confidence about our opportunities beyond this year.

So with that as a perspective, now let's get into some of the details.

Slide 7 shows EPS growth and margin expansion.

As Rich mentioned, before merger-related effects, our second-quarter EPS was $0.70, and this is our ninth straight quarter of double-digit growth in adjusted EPS.

Our adjusted consolidated operating income margin was 23.9%.

That is up substantially year-over-year and up 20 basis points sequentially, with our wireline business driving the sequential expansion.

We continue to expect to operate at the top end of the 23% to 24% margin range that we provided for 2007, as benefits from merger synergies and operational improvements outweigh costs from our U-verse rollout.

And we expect to deliver continued double-digit growth in adjusted EPS this year and next.

Slide 8 provides a quick update on merger integration and synergy run rates.

Last year, we achieved $1.1 billion in savings from our SBC-AT&T integration.

That is a combination of both expense and capital savings.

And it was about $300 million above our previous outlook.

And through the first half of this year, as we layer on BellSouth integration, we realized approximately $1.9 billion in merger integration savings; again, that is combined capital and expense savings.

We're getting a lot of things done this year.

Our support and staff consolidations are moving forward as planned.

We have completed the migration of BellSouth mass-market long distance traffic to the AT&T network.

And our original target was the third quarter, so we completed this project ahead of schedule.

And rebranding efforts are on track and should largely be completed in the third quarter.

Even more important, we have a lot of headroom in terms of merger synergies.

We continue to expect synergies above $3 billion this year, growing to over $5 billion next year.

Now, while the synergy execution is important, as I said, I think the key news in our results this quarter is the progress we're delivering in top-line revenue growth.

The chart on slide 9 shows the revenue growth trajectory over the past five quarters.

This total revenue versus pro forma results for 2006, and so it combines AT&T, BellSouth and Cingular.

You see a steady ramp in the growth rates, and that ramp is driven by accelerating wireless growth, substantial improvements in enterprise, and solid regional results, both in business and consumer, resulting in 2% year-over-year growth and 1.4% sequential growth.

This chart shows complete pro forma trends, and it includes results from our national mass market business in all quarters.

And as you know, proactive marketing stopped in this business unit in 2004, and as a result, national mass market revenues have declined at a 20% plus rate.

So to provide some perspective on revenue growth looking ahead, as the national mass market revenue base get smaller, our revenue growth in second quarter excluding this unit was 3.4%.

Now, the number one driver of revenues is accelerating growth in wireless, shown on slide 10.

In the second quarter, our wireless service revenue growth rate ramped to 14.9%, double the rate we saw a year ago.

We've strengthened subscriber growth, with 1.5 million net adds, up 22% from the first quarter of this year, and most of that increase came from postpaid net adds, which were up 34% from the first quarter.

Over the past four quarters, we've increased wireless subscribers by 6.4 million, and that is better than 11% growth.

We've also had a strong upturn in wireless ARPU growth, boosted by explosive growth in data.

Total ARPU grew 3.6% in the second quarter, and that is our strongest year-over-year increase in several years.

And our postpaid base had even stronger ARPU, up more than 6%.

As you know, on June 29th, we launched the iPhone with Apple and the results have been terrific.

We had just a day and a half of iPhone sales and activations in the second quarter, but in that short timeframe we had 146,000 activations, with over 40% of those being new customers.

The average rate plans for these subscribers is significantly above our current average ARPU.

And demand continues to be strong, and we continue to see traffic levels in our stores above historical levels.

I think it may be an understatement to say that no device in the history of the wireless industry has come out with more fanfare than was the case with the iPhone.

Expectations were certainly high.

But I'm pleased to say that the iPhone has met them, with a truly unique user interface, a great Web browser, video iPod, and on top of it all, a high-quality wireless phone.

Initial customer feedback has been off the charts, and we look forward to continuing our relationship with Apple for years to come.

As I said, the number one driver behind ARPU growth and the overall wireless revenue ramp is very strong gains in wireless data.

The highlights are on slide 11.

Year-over-year, wireless data revenue growth was a robust 67%, taking us to 1.7 billion, and our wireless data ARPU was up 52%.

Data now accounts for 17% of total wireless service revenues and more than $10 of our postpaid ARPU.

And as strong as these numbers are, it's clear to us we are still early in the game, and there is a huge amount of upside opportunity in wireless data services.

Only about 60% of our wireless customers are active data users today, so there is plenty of headroom.

And across our data customer base, while usage is growing, there's a lot of room for growth as applications and handsets are increasingly datacentric.

Historically, data growth has been driven by text messaging.

But we're now seeing strong increases in both consumer and business data usage and we're seeing strong growth across all product categories, including e-mail, downloads, media bundles, Internet access, laptop connectivity, Smartphone connectivity, and enterprise vertical market solutions.

It's clear to us we're at the beginning of dramatic growth in wireless data.

And in fact, I believe one of the things we're seeing the iPhone do is broaden the appeal and dramatically ratchet up expectations for a data-rich wireless experience.

The iPhone is just one of a host of new data-rich products and services that we've recently launched.

A few of the most notable are on slide 12.

I think it's important to understand the advantages that we get from scale in developing these new products.

Our coverage and distribution, combined with the scale opportunities of GSM as the world wireless standard, is a compelling combination for us as well as our strategic partners.

We just announced the national launch of Video Share across the country to nearly 160 3G markets.

AT&T Video Share is a unique, groundbreaking 3G service that enables users to share live video over their wireless phones while simultaneously carrying on a voice call.

We've launched a number of new 3G devices, including the thin Samsung A717 and A727, both of which support our Video Share product.

We also launched a North American exclusive with the BlackBerry Curve, the lightest and thinnest BlackBerry ever made, with a full QWERTY keyboard.

And we now have more than 5 million customers with 3G handsets in the base; that is double the total of last quarter.

In addition to increased revenues, our device lineup, combined with excellent network coverage and quality, have helped drive down churn.

Slide 13 shows the trends.

Postpaid churn dropped to 1.2% in the second quarter, down 30 basis points year-over-year and down 10 basis points sequentially, to our lowest level ever.

These churn improvements have come despite continued pressure from TDMA migrations, which we estimate had about a 5 to 10 basis point impact on postpaid churn.

We continue to make good progress migrating TDMA postpaid customers to GSM.

At the end of the second quarter, we had approximately 1.3 million subscribers remaining on TDMA, and that is down from 2.4 million six months earlier.

More than half of our remaining TDMA subscribers are wholesale.

So churn is moving in the right direction.

We expect to see continued improvements as we launch new products, further enhance the network and move beyond our TDMA migration.

As we've accelerated revenue growth and lowered churn, we've also expanded wireless margins and grown wireless income.

The details are on slide 14.

Versus the year-ago quarter, second-quarter adjusted wireless operating income was up 70% and adjusted service EBITDA was up 32%.

The table on this slide also shows sequential margin changes.

And the decline from first-quarter levels was primarily due to two factors.

One, preparation for the iPhone launch, including staffing, training, store prep and advertising accounted, for about one-third of the decline.

And the remainder reflects increased customer acquisition costs, including handsets, particularly with a higher mix of more advanced data-centric devices being sold.

The benefits of stronger subscriber growth, though, and increased customer adoption of data-rich handsets are clearly a positive force going forward, and our outlook for wireless margins has not changed.

We expect full-year average EBITDA margins to be in the low 40% range next year, with clear opportunities for further expansion beyond 2008.

In addition to wireless, I think the other big news in this quarter results is the improvement we're achieving in enterprise trends, and the details are on slide 15.

The chart shown here is the same one we provided in the past few quarters.

It shows trends in total enterprise revenues, excluding CPE sales and M&A impacts.

As you see, a year ago, we posted a year-over-year decline of 5.1%.

The past three quarters, that moved into the 3 to mid-3% range.

We said the path to revenue growth would be a step function, not linear, and this quarter we took a major step up, with a decline of less than a percent.

Sequentially, recurring enterprise revenues were up 1.9% over the first quarter.

And as I said at the outset, we have a clear line of sight to positive enterprise revenue growth.

There are a number of drivers.

Demand continues to be solid; data transport volumes are strong; IP services, including virtual private networks, managed Internet service and hosting, grew more than 18% in the quarter.

IP services now make up a third of our total enterprise data revenues.

Our customers continue to respond to good network reliability and advanced product sets, and we're winning contracts.

We have a premier global network for enterprise customers and we're expanding our capabilities in key growth areas like hosting, international and wireless.

By the end of 2007, we expect to have 38 Internet data centers deployed around the world, and the AT&T global network will provide multinational companies with MPOS-based access from 155 countries via more than 2000 service nodes.

Again, this is an area of our business that has great potential, and we're on track to do what we set out to do, and that is return to sustainable positive enterprise revenue growth.

While we improved trends in enterprise, we've also sustained good growth in regional business, including the small and medium business space.

Slide 16 has the details.

Our regional business revenues grew by 4.5%, driven by both voice and data services.

Data, which grew more than 7%, is now approaching 30% of total revenues.

Data growth was led by strength in managed Internet, virtual private networking, and DSL.

These IP-based services make up more than 40% of the regional business data revenues, and they are growing at a mid-teens rate.

Voice revenues also continue to grow in regional business.

Access lines increased in the quarter, as they have over the past several quarters, churn remains stable and low, and ARPU has grown steadily over several quarters as customers add more features.

Revenues from small- and medium-sized businesses in this category grew even faster, at more than 6%, just as they did last quarter.

So the small and medium space continues to be very solid for us.

Slide 17 shows regional consumer trends, where despite increasing cable competition we continue to deliver stable revenues, up 4/10 of a percent year-over-year and 1.1% sequentially.

The drivers, again, are bundling and broadband, but with an increasing role for video.

The volume measure that correlates most consistently with our consumer growth rates continues to be revenue connections.

That is access lines plus high-speed Internet plus video.

And over the past year, we've had a net gain in regional consumer connections from 946,000, as gains in high-speed Internet and video have more than offset net declines in traditional access lines.

Our high-speed Internet connections are up 2.2 million over the past year to reach 13.3 million in service.

35% of our consumer primary lines also have broadband service, up from 28% a year ago.

And in California and Nevada, broadband penetration of primary lines is now at 43%.

46% of our DSL base takes speed tiers of 3 megabits or more; that is up from 34% from a year ago.

And overall DSL churn rates remain low.

Our consumer primary lines declined by 193,000 in the second quarter, down substantially from a pro forma decline of 528,000 for the year-earlier quarter.

But these totals in part reflect migrations from wholesale, and when you exclude these migrations, the change in total consumer switched access lines was generally consistent, pretty flat, with year-earlier results despite a nearly 30% increase year-over-year in competitive footprint by cable companies in our regions.

The emerging opportunity for us in regional consumer is video, and slide 18 provides an update.

In the second quarter we added 200,000 total video subscribers.

That includes bundled satellite combined with subscribers through our U-verse video service.

This 200,000 net gain was the best ever total, nearly double the pro forma total in the year-ago second quarter.

And it's also up from results in the first quarter of this year.

We now have 1.9 million total bundled video subscribers, with more than 600,000 added over the past year.

And at the end of the second quarter, nearly 6% of consumer primary lines subscribed to a video solution from us.

So the bottom-line is we are selling video, and consumers increasingly are coming to expect AT&T to be a provider of innovative, high-quality television.

I think it's particularly gratifying to see the positive customer response and the accelerated ramp in our AT&T U-verse IP video service.

Slide 19 has the highlights.

Six months ago, we had 3000 U-verse video subscribers.

At the end of the first quarter, we had 13,000.

And at the end of June, we were at 51,000.

So as you can see, we've ramped installation significantly.

We are now up and selling in portions of 23 metropolitan areas.

And we expect to continue to expand deployment and continue our ramp up, with a target of reaching more than 10,000 installs per week in the fourth quarter.

More than 80% of our U-verse subscribers are taking higher-end video packages, and 65% are taking our highest speed broadband services, both of which drives revenue per customer.

Our confidence in the technology and the service quality is being confirmed by customer feedback, and we have a very positive outlook for AT&T U-verse video.

We're working on detailed plans for the Southeast region, and will include a complete update at our analyst conference in December.

But in broad terms, we anticipate capital cost per household passed in the Southeast to come in about 10% to 15% less than in our 13 states due to the ability to leverage superhub offices and infrastructure investments, including billing and customer support systems.

We will build out to approximately the same portion of the Southeast footprint as we are in the 13 states, around 50% to 55%.

Our Southeast plans do not change our capital guidance for 2007 and '08 of midteens as a percent of revenue.

And we will begin deployment of U-verse in our first Southeast market by year end.

Now before I close, let me provide an update on free cash flow and value return to shareowners.

The details are on slide 20.

We had strong cash flow quarter, and through the first half of the year, cash from operations totaled $15 billion.

Free cash flow after CapEx and dividends totaled $3.1 billion, and we now expect free cash flow after dividends for the full year to come in between $5 billion and $6 billion, up from our previous guidance of between $4 billion and $5 billion.

I think I will pause there for a minute, because many of you that I've talked to over the last six months probably want to stop and collectively say, I told you so, because many of you told me that you expected free cash flow to be higher.

And so you are correct.

We are confident in the free cash flow numbers for the year being in the $5 billion to $6 billion range.

But in addition to cash from operations, we also generated in the first half of 2007 more than $500 million from the sale of nonstrategic assets, including real estate.

And this cash generation gives us both the flexibility to invest in the future of the business and return substantial cash to shareowners.

As you saw in our press release, we completed the $10 billion share repurchase that we began in 2006, and completed it ahead of schedule in early July.

And in the first half of this year, through dividends and share repurchase, we've returned more than $11 billion of cash to shareowners.

We now have 125 million shares remaining in our current share repurchase authorization that was approved by our Board.

We expect to continue with repurchases under this authorization over the remainder of 2007.

So let me close with a quick recap, which is on slide 21.

As I said at the outset, the Company continues to execute and perform well.

We have a strong record of delivering on our targets, and that continued in the second quarter, and we've got good momentum heading into the second half.

And more to the point, we're seeing positive trends that are encouraging as we look ahead to the longer-term potential of the business.

Our merger synergy run rates are growing.

Revenue growth rates continue to accelerate, with a strong ramp in wireless and substantial improvements in enterprise.

And at the same time, margins are solid, adjusted earnings growth is on track with our double-digit outlook, and cash flow is strong, with expected free cash flow after dividends now in the $5 billion to $6 billion range.

So in summary, a lot to be positive about as we look to the second half.

And as we look to the years ahead, we're confident in the long-term potential of this business.

So with that, Rich, I think we will stop here and we will open it up for questions.

Great.

Thank you, Rick.

Tatiana, we are now ready to start the Q&A session, please.

Thank you.

(OPERATOR INSTRUCTIONS) John Hodulik from UBS.

Thanks.

Good morning.

First -- a couple questions.

First, on the CapEx, it came in a little lighter than we expected.

Can you give us the breakout between wireline and wireless?

And then, is there any chance I can get you to update your '08 outlook for free cash flow?

John, first of all on CapEx, we are running in total a little bit light of our plan and our guidance expectations for the year through the first half.

And we are running a little bit light there primarily on the wireless side.

Some of that reflects, frankly, the fact that, as we've talked about in the past, we're in a very good position in terms of the sell side density in the network, the spectrum that we have, the availability we have as a result of our network integration of existing GSM and EDGE equipment.

So that has, I think, held down capital expenditures in the first half of the year.

In addition to that, in the second quarter, there were some vendor credits that are just part of our ongoing agreements with some vendors that reduced CapEx a little bit further.

But we do expect CapEx to be a little higher in the second half of this year and a little higher, in particular, on the wireless side.

And part of that will reflect, frankly, additional CapEx as we continue to expand and grow the 3G network.

In fact, most of our expenditures these days in CapEx that are network related in wireless are 3G.

2008, we're a little premature in terms of expanding guidance on cash flow in 2008.

We're in the early stages of developing those business plans now.

But we will be in position to lay that out for you, I think in pretty good detail, in our analyst conference in December.

Okay.

Thanks, Rick.

Chris Larsen from Credit Suisse.

Hi.

Thanks.

Two areas of big improvement -- enterprise and continued strength in small business.

On the enterprise side, can you give us an idea of is that share, is that price, is it usage which is driving the step function that we saw this quarter?

And then secondly, on the small business, we've seen a decline in competition over the last several years.

Can you give us an idea of what the level of competition in small/medium business is today and what you might be seeing or what you might expect to see out of the cable guys, who have announced intentions to get into that business?

Thanks.

Sure, Chris.

First, on the enterprise side.

As I mentioned earlier, really, demand across the business there continues to be strong.

Even in the voice side in enterprise, we are seeing some year-over-year growth in just plain old voice long distance traffic, as an example.

So we are seeing good volumes there.

We continue to see very good demand in transport, although there continues to be, I think, a little more price pressure on the transport side, because historically we had some price reductions in transport that led to a greater gap between the embedded contract pricing and the point-of-sale pricing.

And then we are seeing very good growth in IP-based services, particularly VPN, managed Internet services, and hosting services.

When you step back from the numbers, I think a couple of things that are important in the trends.

First, in terms of point-of-sale pricing, we continue to see some flattening in point-of-sale pricing.

And we are seeing it, frankly, right now in both the voice and data side, both voice LD pricing as well as some transport pricing.

So I think that is encouraging.

On the voice side in enterprise this quarter, we had a voice revenue year-over-year decline of about 4.5%.

That is the smallest decline we've had in a long, long time, and that is a function of some flattening in point-of-sale pricing along with a little bit of growth in minutes.

So I think that helped out.

And then of course our focus and our emphasis in this business continues to be on the data side, and particularly with IP services.

And so seeing 18% to 19% growth in IP-based services is a terrific sign for enterprise.

I don't have good data to share with you relative to market share, but I think we can -- as we're looking at transactions, I think we are certainly competitive in the marketplace; we've got a great set of products and capabilities.

And so we're doing very well from a share perspective.

In small and medium business, the situation there, really in the last several quarters in terms of the results and the trends we're seeing, hasn't changed dramatically.

We are continuing to see growth in both voice and data in small and medium business, and in our regional business overall, we're continuing to see access line gains, and we are seeing relatively low churn rates for both access lines and broadband services.

Where we do have competitive losses -- and maybe a good way to say this would be if you look at our access line disconnects in the regional business space, most of them are related to technology migration.

Only about 30% of access line disconnects are competitive disconnects.

And in terms of cable competition up to this point, of that 30%, the disconnects that are cable related are very small -- 4 to 5 percentage points of that 30.

So we are not seeing a lot in the market at this point, other than probably from Cox, who has been in the market for some time.

But I do expect over this next year we will see more activity as Comcast and Time Warner both begin to roll out their plans.

Again, I think where we will see them will tend to be more in the lower end of the small/medium business space, kind of 10 lines and under, maybe even 4 lines and under.

And again, so far we are not seeing much impact there.

In fact, our small/medium business revenue growth was in the mid 6% range this quarter, about the same as last quarter.

Thanks a lot.

Mike McCormack from Bear Stearns.

Thanks, guys.

A couple of questions.

First, on wireless margins -- obviously some pressure this quarter.

You identified the iPhone piece of that, which obviously should abate, and the benefit from that TDMA sunset next year.

But maybe your sense on how you see the competitive landscape changing.

Obviously, you are spending money on handset subsidies and advertising.

Does that come down over time or should we expect that to get worse?

And then on wireless ARPU, maybe just a sense on the growth drivers there.

Are the AirCards having an impact yet, or what is driving that higher?

Thanks.

Sure, Mike.

On wireless margins, I think, as we've said, there were two primary factors there.

We had -- one way to look at it is adjusted EBITDA margins were down in the second quarter about 140 basis points from the first quarter.

And roughly a third of that change was related to, essentially, our preparations for the iPhone.

We worked with Apple and jointly did some advertising, so we had some costs associated with that in preparation for the launch.

We also hired additional people for our stores, put them through training.

We had costs to develop a new activation process for the product.

And then of course the testing we went through in the product.

So all of those things contributed some cost into the second quarter related to the launch.

But the bigger factor, and two-thirds of it, really is related to additional acquisition costs, some advertising, more in handset subsidies, just related to our ongoing business, and primarily our postpaid business.

As we said in the first quarter, if there was one thing we felt we wanted to improve on going forward during the year is to increase our share in postpaid gross adds and net adds.

And we had gotten, I think, a little bit out of the market in our handset pricing, particularly for some of the higher end data devices.

And so we did get a little more aggressive there.

We've met competitors generally in the pricing that is out there.

We will see how the market develops over the rest of the year.

Those things tend to kind of ebb and flow in the marketplace.

But I'm very pleased with the results we had.

Presumably the cost saves that you are talking about would offset the continued pressure on the handset subsidy side for the balance of the year, though, I would imagine.

Yes, absolutely.

And in fact, we would expect -- that is why I said we are not changing any guidance related to our margins.

We will be in the upper 30s for all of this year, and we still expect to be in the lower '40s for next year.

And you should see a ramp in margins between now and through the end of next year as we go through that process and as we take our TDMA network out of service in the first part of next year.

So no changes to the guidance.

And in fact, if anything, I was not just supported, but encouraging our wireless business unit to be a little more aggressive and get the momentum that we are seeing right now behind the business in gross sales and particularly in postpaid.

And we had a nice ramp that occurred, not just between first and second quarter, but a nice ramp that occurred throughout the second quarter, as some of the things we are doing took effect.

So we are pleased with it.

And as you look ahead, in particular, when you see what is driving the business -- and kind of going to the second part of your question -- what is driving wireless ARPU, it is on the data side, and it is increasingly customers buying packages of data services for their devices.

So as we begin to get more devices into the base, more Smartphones into the base, more 3G devices into the base, then you start to migrate customers from simply buying a package of text messages to customers that are buying media bundles.

And in fact, year-over-year, if you look at the growth on our data services, the biggest single component of it was the growth in customers buying media bundles, which gives them a package of text messages, multimedia messages and Internet access.

So are you seeing any traction, Rick, in the enterprise segment with AirCards yet, or is it too early to tell?

No, we are seeing -- we are continuing to see traction there.

And I think that will also be a growing portion of wireless data revenues.

We are seeing it across both business and consumer, we're seeing it with AirCards.

We're also seeing it with Internet access and e-mail connectivity across a variety of devices.

Great.

Thanks for the time, guys.

Simon Flannery from Morgan Stanley.

Okay, thank you.

Good morning.

Can you just help us a little bit more on the U-verse side of things?

The adds are starting to ramp now.

Can you give us a little bit more clarity around things like homes passed and what sort of penetration rates?

You talked about 10% after six months.

How is that all tracking versus expectations, as well as the cost to install?

And then if you have any updated thoughts on the 700 megahertz auction that preceded that as well?

Thanks.

Sure, Simon.

U-verse is ramping now very nicely.

I think relative to our plans for the year, it is really right on target for the year in terms of both the construction side as well as the sales and installation phase.

We really have moved into more of a blocking/tackling phase of this product rollout.

So it is about continuing to build and increase the number of homes passed.

And we are up in -- I think right at 4 million -- or right at the halfway point in the year, we're about halfway to our target of 8 million homes passed for the year.

And we are expanding marketing efforts across -- steadily across the homes that we are passing, and increasing the number of homes we're marketing to in existing markets, and then of course rolling out additional markets.

We are in, as I said, about 23 metropolitan areas now.

That continues to increase each month, as do the number of homes we are marketing to.

We are seeing, I think, very good sales rates.

And our installation results are improving.

We're seeing good flowthrough of orders in our systems; that statistic continues to improve each month.

Our installation times are still up in the 7 to 7-plus hour range on average, but that's -- to a large degree, that is a function of bringing a lot of new technicians on board and getting them up to the learning curve.

I was on a U-verse installation last week, and this is a technician who is one of our more experienced technicians in San Antonio.

And it was an installation done basically in four hours.

So on the installation side of things, I would tell you there is probably two primary variables on a case-by-case basis.

It has to do with, number one, the amount of experience of the technician.

And secondly, with the condition of the wiring inside the home.

And in some cases, where we get into longer install times, it is because we are having to do more rewiring inside the house.

But all of the metrics in terms of installation and costs are really going according to plan at this point.

I think, actually, on the upside, on the revenue side, it continues to be better than we expected in terms of customer adoption of higher-end video packages.

It continues to be higher than we expected on HD; nearly half of new customers are taking and buying HD from us.

And it continues to be higher on the data speeds that customers are buying.

So all of those things, I think, are good signs from an ARPU perspective.

And on the 700 megahertz?

And the 700 megahertz, Simon, we have a group internally that is studying the 700 megahertz auction and our potential need for that spectrum, and different uses for certain bands of that spectrum.

And this is a similar approach to what we've taken in past auctions.

But I think it is premature at this point to talk about strategy related to the auction.

In fact, we won't do that prior to the auctions.

Okay, thank you.

Jason Armstrong from Goldman Sachs.

Great.

Thanks.

Good morning, Rick.

A couple questions.

First, on wireless margins, maybe just sort of a longer-term question.

You are sort of talking about low 40s as the opportunity for '08, which matches what you have been saying for a while.

But the industry backdrop here has changed a little bit.

You've still got strong revenue growth accelerating for you every quarter.

But there is much more of a balance now between volume growth and price growth, rather than revenue growth just purely being driven by volume.

So this would seem to set a backdrop which would support much higher long-term margins.

So just wondering if you can give me your perspective on that.

And then double-digit EPS growth.

Again, I guess, a longer-term question.

If you think about the revenue trajectory you're on, the operating leverage in the business, and the ability to buy back 4% to 5% of your shares every year, what stops you from talking about this as a business that can grow earnings sort of double-digit longer-term.

In other words, beyond the 2008 timeframe you've talked about.

Thanks.

Good questions, Jason.

First on wireless margins.

I think there could be some upside.

We have to see how the business continues to develop.

But I think the surprise for many people this year is the fact that there was -- going into the year, there was a lot of question, concern, focus about penetration in the market and will that begin to top out.

And what we are seeing is now continued pretty good customer growth.

But on top of it, we are really ramping up ARPUs; and a lot of that, again, is data related.

And so the upside as we go forward in the future may be in that ARPU equation related to data.

I think certainly we feel very comfortable with upper 30s EBITDA margins this year.

We feel very comfortable with moving that into the lower 40s overall for 2008.

But as I mentioned earlier, I would expect us to ramp pretty steadily over this next 18 months or so.

And we will get benefits throughout next year as we take the TDMA network out of service and as we are able to take costs out and trim and manage the network post bringing TDMA down.

So that, combined with if we continue on a very good ARPU trajectory, could drive margins even harder in this business.

And as we've said, our expectation beyond 2008 would be -- certainly, with the trends we're seeing today -- would be to continue to grow those margin levels.

On the earnings growth, we are obviously very comfortable and confident in the guidance that we've provided, which is double-digit growth for this year, double-digit growth for next year.

We're looking at the same issues that you mentioned in your question in terms of the opportunities to ramp top-line revenues.

And in particular, when you look across our business and just look at the major segments, we are seeing very good growth in wireless service revenues and actually some increasing ramp there.

We are seeing very good trends in enterprise.

I think it gives us more confident about returning -- and not just returning, but getting back to a sustainable top-line growth situation in enterprise.

In regional, regional business continues to be very solid, and we've got some opportunities on the consumer side as we ramp video.

So that takes you back then to two areas of the business that have been declining and actually dampening our growth rate somewhat.

One of those is wholesale.

And there have just been a lot of changes in the business in terms of consolidation of companies and networks, as well as some reductions in UNE-P lines, that are impacting the wholesale business.

But at the end of the day, that is still a very good business for us.

And I think we are -- in the next couple of quarters you will see that business, which is about a $3.5 billion a quarter business, may decline a little bit more yet due to some of the consolidation and UNE-P pressures, but then we will start to flatten out and then we'll actually have some opportunities, I think, in the future to begin to grow there.

And then the national mass market business is one that has actually been very good to us in terms of cash and value.

And as that declines, that will have less of a drag.

So you start to see the ability to continue to ramp top line, to continue to drive costs out of our business, not just through merger synergies, but as we get more scale, particularly in IP-based services, the ability to begin to ramp margins there and begin to move margins more in the direction of legacy services on the IP side is important to us as well.

And then, as you said, with the cash flow we are producing and the ability to continue to repurchase some shares, I think it gives us good opportunity for good earnings growth.

And that is one of the things we are looking at right now on a longer-term basis.

And again, I think we will be able to give you more definitive guidance when we get together in December.

Okay, thanks.

David Barden from Banc of America.

Thanks, guys, for taking the question.

Maybe a couple housekeeping items and then just one more question.

Rick, were your comments on the buyback intended to indicate that you are going to -- hope to complete the 125 million share buyback in the second half or just kind of pursue it in the second half?

You also gave us, on the BellSouth parameters, 10% or 15% discount to cost per home passed for the U-verse project.

Could you give us what that home passed cost -- homes passed cost is now?

And then I guess just the last question is on DSL.

Still growth there, but penetration rates are starting to slow down.

I was wondering if you could kind of give us some color around what the outlook here for DSL penetration is.

Is it, you think, saturation of the market or is it kind of a market share battle with cable at the margin as your users continue to move upmarket in the speed category?

Thank you very much.

Sure, David.

First of all on the buyback, we will -- as I said, we've got 125 million shares remaining under the authorization, and we will continue to buy under that authorization.

I wouldn't tell you that we will complete that authorization this year.

We will continue to buy under it.

And the amounts that we buy will be dependent on the cash flow that we generate in the second half of the year, and it will be dependent on market conditions, obviously.

But I think we will continue -- particularly at current price levels, frankly, we will continue to be very active in share repurchase.

On U-verse, in our 13 states, we have a capital cost per home passed -- and this is all-inclusive.

So it includes the video serving infrastructure, as well as the construction in the local loop, and it includes development of the software and OCS systems that support these customers.

So everything combined is about $330, roughly, per home passed in the 13 states.

As we move into the Southeast, as I said, we will leverage some of the work that we've done in the 13 states.

We will benefit from the fact that the Southeast has fiber deployed a little deeper into their network.

And offsetting some of that, though, the Southeast in terms of density is a little -- tends to be a little less dense than our 13 states.

So when you put all that together, again, I think we'll be at a cost that is probably 10% to 15% per home less than what we've seen in the 13 states, primarily by leveraging some of the work that we've already done.

In DSL, kind of an interesting thing.

First of all, when we look at DSL, we're really looking at broadband in total.

So we look across it including the customers that we're bringing in with U-verse and some customers with satellite and so forth.

So we did overall about 400,000 broadband net adds in the quarter.

And that was down -- it is down sequentially just due to normal seasonality and end-of-school disconnects.

But it was also down somewhat from second quarter of last year.

When you break the numbers apart, though, what we find is that we actually increased gross adds and gross sales of broadband products second quarter this year versus second quarter last year.

So we saw good activity in sales.

And we saw churn rates that were down slightly.

On a percentage basis of the base, the churn was down slightly.

The reason the number has come down -- and this is just as you continue to build a larger and larger base -- is the churn number is kind of a bigger challenge to overcome each quarter.

But underlying the business in both churn and in gross sales, we're seeing good activity.

And certainly when you look at the fact that, while we've made good progress in penetrating our base, still at just 35% on average of penetration of our primary access lines, we feel like there is still substantial room to grow broadband.

Two other things happening in broadband that I think are important.

One is -- and we will see how this quarter turns out when everyone reports.

I don't think it will be any different, but when we look over the last four quarters, the broadband share of spend in the marketplace has been split pretty evenly in our territory.

To us, as we look at everyone's numbers, it looks like we are getting about 50% of broadband share.

But secondly, we're also seeing in the DSL revenues -- we're seeing the pricing -- and some of this is a result of the price changes we implemented in the second half of last year in broadband -- but we are seeing our ARPU start to stabilize.

And actually, it's increasing a little bit in the business side and it's flattening out pretty well in consumer.

And that is a function of the standard pricing we put in and it's a function of customers upgrading service to higher data speeds.

And I guess the last thing I'd mention on DSL is that there is always concerns and issues around that people talk about related to the broadband speeds in the local loop.

And the truth is there, particularly with our Lightspeed and U-verse deployment, we are going to continue to have substantial upside to move customers in the future up to higher broadband speeds.

Which I think will help to continue to keep churn levels low, will help competitively and will also improve ARPU.

But even today, with all the movement we've had in the base, we still have less than 10% of our customers that are buying at 6 megabit speeds.

So we have substantial room to upgrade customers as their needs increase or as the demand is there for higher speeds in the local loop.

Great.

Thanks for the color, Rick.

Tom Seitz from Lehman Brothers.

Yes.

Thanks for taking the question.

Rick, you talked a little bit about wholesale and the fact that visibility is improving a little bit.

Can you maybe flesh that out a little bit?

I mean, that is sort of the third leg of the stool on business, and once that turns, you are home free.

And then maybe could we get a comment perhaps about Verizon's settlement with Broadcom -- maybe what your exposure is with next generation devices, and if you can comment as to whether or not you are looking at a similar settlement?

Thanks.

Sure, Tom.

First of all, I'm not going to comment on the Verizon settlement at this point.

This is still an issue where we're looking at a number of options, haven't reached any resolution yet.

So it would be premature for me to comment related to this.

But on the wholesale side, wholesale for us is a combination of products.

And it is really -- you can break it down into three pretty good-sized pieces.

One is UNE-P lines and resale lines and revenues from those lines, which have been declining, but those are starting to get down into a level where I think they will start to stabilize somewhat.

And the pricing there over the past year or so has moved up, and the pricing now is staying, I think, pretty stable and the pricing is at reasonable rates there.

Secondly then, there is carrying primarily voice traffic and long distance traffic on the wholesale network.

And that is the element of the business, that there have been some moving pieces because of industry consolidation, and even some pieces where, frankly, we have moved to revenues or moved traffic to our own network.

But in doing so, we no longer then recognize some termination revenues, some access revenues that we did recognize in the past under the old WilTel agreement.

So that is one that's kind of interesting where it has impacted negatively our wholesale revenues, but obviously we get all the cost saving on the access side of things.

And from a net margin perspective, it has been positive to us.

But we are working through that transition, we're working through transitions with other carriers.

And to some degree as other carriers migrate some traffic off, it has given us some capacity that we are being able to use by putting our own traffic on the network.

So again, it has some negative impact on revenues in the short-term, has some positive impacts on margin and bottom line, and I think that all starts to settle out over the next two to three quarters.

So having said that, then the third area of revenue there and some opportunity for us is in the transport side in wholesale, which has been pretty stable.

And I think actually going forward, I think we have some opportunities to grow that business.

And when you put it together, it's a $3.5 billion a quarter revenue stream.

We have a little bit of consolidation to go through yet, so that may drop somewhat.

But as we get into next year, I think then you've got a pretty stable revenue stream that stays in the 3.3, $3.4 billion kind of range with some opportunities to grow on the data side.

Thanks very much for the color.

This next question will have to be our last question for this morning.

Thank you.

Frank Louthan from Raymond James.

Great, thank you.

Just back on the enterprise side.

Can you give us an idea of where you're seeing managed services, contracts coming into our RFPs, and how much that is moving the needle?

And then you're looking at the SME part of the business, so you're seeing some traction there.

Give us an idea of the size customers that you are targeting with your sales force.

What is the range of monthly billings kind of at the low end and medium end of where your sales force is targeting for on the SME side as far as monthly billings?

Thanks.

Well, Frank, on the small-medium business side in our various very smallest segments, the truth is we go after in the marketplace customers from the very smallest customers, four-line and under type size ranges, up to some medium business customers.

In our regional operations, some regional government, medical education kinds of businesses that are pretty good size.

So we are across the entire range there.

We approach that market a little differently, depending upon size in some cases.

It's an active sales force on the street.

But at the low end of the range, it tends to be more call-center driven in terms of the sales efforts.

But as I said, the encouraging thing there, I think, is that we're seeing both growth in voice and data, we're seeing growth in access lines.

We benefited, I think, from a pretty good economy.

We will see how that plays out as we go forward, but that has certainly helped in that space.

And we are increasingly -- I think the opportunity for us as we start to package some products around Internet access, broadband, voice, wireless, and some products on, for example, the security side that we've developed for larger enterprise customers, we're starting to package those and bring those downmarket.

I think that creates a good opportunity for us.

And that reflects some of the growth you see in that segment.

On the data side, in small/medium business, we are seeing very good growth in managed Internet service, in DSL.

We are seeing good growth in the larger end of the segment in some VPN kinds of services.

So I don't know if that entirely answers your question, but we are covering that entire market.

We cover it a little differently, depending on the size of the customer.

But again, just like in other aspects of our business, I think the ability to bundle wireless data, traditional voice, and to bundle that, put that together in some interesting packages, is particularly attractive for small/medium business customers.

Is that business growing faster than some -- at the smaller end -- faster than some other areas of the enterprise?

And are you ramping up the sales force to go after those customers?

It is growing.

It has tended to grow -- over the last couple of years, it has grown more in the small/medium category.

But it has not been as much about a volume or demand, I think, factor, as it hasn't had some of the same impacts from technology migration and from some of the pricing pressures that you've seen in -- certainly in the enterprise space and even down into some of the larger regional customers.

Great, thanks.

Very helpful.

Okay.

Well, that concludes our Q&A session.

Rick, I believe you have a few closing comments for us this morning.

Well, thanks, Rich.

And let me close and just underscore a couple of points.

First, I think you know at AT&T we take pride in our ability to deliver on targets and to do the things that we say we are going to do.

And I think the results we reported this morning continue a strong, consistent record in this regard.

Again, it was our ninth straight quarter of double-digit adjusted EPS growth.

Margins continue to be strong and improving in both wireless and wireline.

We had very good cash flow performance and raised our full-year target range for cash flow after dividends.

And beyond these achievements, though, I think the most encouraging part of the quarter from my perspective is the ramp we're seeing in revenue growth.

And that is the element that really gives us confidence as we look at this business into 2008 and beyond 2008.

Again, we are seeing wireless growth accelerate.

The iPhone launch went very well and the iPhone is going to provide a boost to those wireless revenues going forward.

Enterprise revenue growth, as we've seen, is approaching an inflection point.

We continue to have very solid regional results, with revenue growth this quarter in both business and consumer.

And then we've got the opportunities in front of us with the ramp of our U-verse video product.

So these trends are all obviously positive for the business, we have good operating momentum heading into the second half, and we're gaining increased visibility and confidence in the trajectory of the business beyond that.

So we are excited about the opportunities in front of us and we are confident in our ability to execute and confident in our ability to deliver for you, our shareowners.

So again, thanks for joining us and thank you for your interest in AT&T.

Great Thank you, Rick.

Tatiana, that will conclude our call this morning.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may all disconnect.